[Federal Register Volume 84, Number 243 (Wednesday, December 18, 2019)]
[Notices]
[Pages 69421-69424]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-27197]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-87722; File No. SR-ICEEU-2019-027]


Self-Regulatory Organizations; ICE Clear Europe Limited; Notice 
of Filing of Proposed Rule Change, as Modified by Partial Amendment No. 
1, Relating to Amendments to the ICE Clear Europe CDS Procedures

December 12, 2019.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 2, 2019, ICE Clear Europe Limited (``ICE Clear Europe'' or 
the ``Clearing House'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change described in Items 
I, II and III below, which Items have been prepared by ICE Clear 
Europe. On December 10, 2019, ICE Clear Europe filed Partial Amendment 
No. 1 to the proposed rule change.\3\ The Commission is publishing this 
notice to solicit comments on the proposed rule change, as modified by 
Partial Amendment No. 1 (hereafter referred to as the ``proposed rule 
change''), from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Partial Amendment No. 1 amended the filing to remove from 
the filed Exhibit 5 certain dates in brackets and replace them with 
new dates and remove other language left in brackets; update page 
numbering in the filed Exhibit 2 so that the page numbering in the 
filed Exhibit 2 states ``of 59'' instead of ``of 60''; and update a 
reference to paragraph 8(c) of the CDS Procedures in the original 
filing so that it instead refers to paragraph 8.1(c) of the CDS 
Procedures.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    ICE Clear Europe proposes to make certain changes to its CDS 
Procedures \4\ to incorporate amendments to the industry-standard ISDA 
2014 Credit Derivatives Definitions (the ``2014 Definitions'') that are 
being adopted in the broader CDS market to address so-called narrowly 
tailored credit events and related matters.
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    \4\ Capitalized terms used but not defined herein have the 
meanings specified in the ICE Clear Europe Rules or CDS Procedures.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, ICE Clear Europe included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. ICE Clear Europe has prepared summaries, 
set forth in sections (A), (B), and (C) below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

(a) Purpose
    ICE Clear Europe proposes amendments to its CDS Procedures to 
incorporate changes to the 2014 Definitions that are intended to 
address so-called ``narrowly tailored credit events''. In the wake of 
certain credit events and potential credit events in the CDS market in 
recent years, the International Swaps and Derivatives Association, Inc. 
(``ISDA''), in consultation with market participants, has developed and 
published the 2019 Narrowly Tailored Credit Event Supplement to the 
2014 ISDA Credit Derivatives Definitions (the ``NTCE

[[Page 69422]]

Supplement'').\5\ The NTCE Supplement, if applied to a CDS transaction, 
effects two principal changes to the 2014 Definitions: (1) A change to 
the definition of the ``Failure to Pay'' credit event designed to 
exclude certain narrowly tailored credit events and (2) a change to the 
process for determining the Outstanding Principal Balance of an 
obligation to address certain obligations of a reference entity that 
were issued at a discount.
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    \5\ The NTCE Supplement is published on the ISDA website at 
https://www.isda.org/a/KDqME/Final-NTCE-Supplement.pdf.
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    As described by ISDA in the attached guidance to the NTCE 
Supplement, the supplement was published in light of concerns among 
market participants and regulators about ``instances of (CDS) market 
participants entering into arrangements with corporations that are 
narrowly tailored to trigger a credit event for CDS contracts while 
minimizing the impact on the corporation, in order to increase payment 
to the buyers of CDS protection.'' \6\ ISDA has expressed concern that 
``narrowly tailored defaults . . . could negatively impact the 
efficiency, reliability and fairness of the overall CDS market.'' 
Regulators have also expressed concern with narrowly tailored or 
manufactured credit events, including a joint statement by the heads of 
the Commission, the Commodity Futures Trading Commission and the UK 
Financial Conduct Authority that such strategies ``may adversely affect 
the integrity, confidence and reputation of the credit derivatives 
markets, as well as markets more generally. These opportunistic 
strategies raise various issues under securities, derivatives, conduct 
and antifraud laws, as well as policy concerns.'' \7\
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    \6\ NTCE Supplement, Guidance on the interpretation of the 
definition of ``Failure to Pay''.
    \7\ Securities and Exchange Commission, Commodity Futures 
Trading Commission and UK Financial Conduct Authority, Joint 
Statement on Opportunistic Strategies in the Credit Derivatives 
Markets (June 24, 2019); see also Update to June 2019 Joint CFTC-
SEC-FCA Statement on Opportunistic Strategies in the Credit 
Derivatives Market (Sept. 19, 2019).
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    With respect to the Failure to Pay credit event, the NTCE 
Supplement adopts a concept of a ``Credit Deterioration Requirement.'' 
If applicable, this requirement will provide that a failure of a 
reference entity to make a payment on an obligation will not constitute 
a Failure to Pay Credit Event if the failure ``does not directly or 
indirectly either result from, or result in, a deterioration in the 
creditworthiness or financial condition'' of the reference entity. As 
such, a ``narrowly tailored'' or ``manufactured'' failure to pay, which 
does not reflect or result in a credit deterioration, would not 
constitute a Credit Event for CDS Contracts that incorporate the NTCE 
Supplement and apply the Credit Deterioration Requirement. The NTCE 
Supplement also includes guidance as to factors relevant to the 
determination of whether credit deterioration has occurred. That 
determination would, under the 2014 Definitions, in the ordinary course 
be made by the relevant Credit Derivatives Determinations Committee.
    The NTCE Supplement also amends the method of calculating the 
Outstanding Principal Balance of obligations. The amendments are 
intended to address a potential scenario where a corporation agrees to 
issue a bond at a substantial discount to its principal amount, where 
the bond could be delivered in settlement of a CDS at its full 
principal amount. Under the 2014 Definitions, the Quantum of the Claim 
(which is used to determine the Outstanding Principal Balance used in 
calculating settlement obligations) is determined taking into account 
any applicable laws insofar as they reduce the size of the claim to 
reflect the original issue price or accrued value of the obligation. 
The NTCE Supplement clarifies that the applicable laws to be considered 
include any bankruptcy or insolvency law or other law affecting 
creditors' rights to which the relevant obligation is or may become 
subject. In addition, the NTCE Supplement includes the concept of 
``Fallback Discounting,'' which if designated to be applicable, 
provides a method for discounting the Quantum of the Claim (where it is 
not otherwise reduced under applicable law or pursuant to its own 
terms) of an obligation that is issued at less than 95% of its 
principal amount, based on straight-line interpolation between the 
issue price and the principal amount.
    ICE Clear Europe has been advised that CDS market participants are 
expected to commence transacting in CDS incorporating the NTCE 
Supplement (with Credit Deterioration Requirement and Fallback 
Discounting applicable) on or about January 27, 2020. In addition, ISDA 
has published, and opened for adherence, an NTCE Protocol pursuant to 
which parties may, on a multilateral basis, agree to amend outstanding, 
non-cleared CDS transactions to incorporate the NTCE Supplement. The 
amendments made by the NTCE Protocol are also expected to have an 
implementation date of on or about January 27, 2020. Adherence to the 
protocol will thus make existing transactions fungible with 
transactions on the new terms. Accordingly, ICE Clear Europe is 
proposing to amend its CDS Procedures for relevant products to 
incorporate the NTCE Supplement, both for new and existing cleared 
transactions. For this purpose, the proposed ICE Clear Europe 
amendments would apply to all cleared CDS contracts with corporate 
(i.e., non-sovereign) reference entities, consistent with the NTCE 
Protocol and the expected approach for new CDS transactions. ICE Clear 
Europe proposes to make such changes effective by the industry 
implementation date.
    Specifically, ICE Clear Europe would amend paragraph 1 of the CDS 
Procedures to include new definitions for ``2019 NTCE Protocol'', 
``2019 NTCE Supplement'' and ``NTCE Protocol Effective Date'', which 
will be the date of implementation of the amendment. The NTCE Protocol 
Effective Date will be January 27, 2020 (or such later date as 
designated by ICE Clear Europe by Circular). ICE Clear Europe would 
renumber the remaining provisions of paragraph 1 of the CDS Procedures 
accordingly.
    ICE Clear Europe would further amend relevant subparts of the CDS 
Procedures to implement the NTCE Supplement for 2014-type CDS Contracts 
cleared by ICE Clear Europe. In this regard, in paragraph 8.1(c) of the 
CDS Procedures, a new subparagraph (iii) would be added to provide that 
for 2014-type CDS Contracts in effect as of the NTCE Protocol Effective 
Date or cleared one or after that date, the Applicable Credit 
Derivatives Definitions include the 2019 NTCE Supplement. Certain other 
amendments would apply to index CDS transactions and certain other 
amendments would apply to single-name CDS transactions.
    For index CDS transactions, for iTraxx Europe transactions, in 
paragraph 9 of the CDS Procedures, the definitions of iTraxx Terms 
Supplement and iTraxx Legacy Terms Supplement would be amended to 
include the new standard terms supplement and confirmations for such 
transactions, which incorporate the NTCE Supplement (or any electronic 
equivalent thereto or other applicable document specified by the 
Clearing House). Pursuant to paragraphs 9.2 and 9.3, the applicable new 
documentation would apply to iTraxx Contracts submitted for clearing on 
or after the NTCE Protocol Effective Date. Conforming changes to other 
provisions to include references to such definitions would be made. In 
addition, a new paragraph 9.8 would be added to provide that existing 
open positions in iTraxx Contracts that are 2014-type CDS Contracts or 
that include a Component

[[Page 69423]]

Transaction that is a 2014-type CDS Contract, would be amended, as of 
the NTCE Protocol Effective Date, to reference the applicable new 
standard terms supplement and confirmation in lieu of the standard 
terms supplement and confirmation previously in effect. This will have 
the effect of converting existing iTraxx Contracts to reference the new 
standard terms incorporating the NTCE Supplement, such that they will 
be fungible with new iTraxx Contracts, which will also reference the 
new standard terms supplement and confirmation.
    Substantially similar changes for CDX.NA Contracts would be made in 
paragraph 10 of the CDS Procedures.
    In the case of Single Name Contracts, the CDS Procedures would be 
amended by adding a new paragraph 11.8, which provides that existing 
open positions in all Single Name Contracts (other than Single Name 
Contracts for which the Relevant Transaction Type is ``Standard Western 
European Sovereign'') that are 2014-type CDS Contracts would be 
amended, effective as of the NTCE Protocol Effective Date, to reference 
the new relevant ISDA physical settlement matrix, to be published as of 
the NTCE Protocol Effective Date. The amendments will have the effect 
of converting existing Single Name Contracts to reference the updated 
physical settlement matrix, such that they will be fungible with new 
Single Name Contracts, which will also reference that matrix. The 
amendments would also provide that the amendments would be effective 
regardless of whether any transaction record in the Deriv/SERV 
warehouse is updated to reflect the change. Conforming changes would be 
made throughout paragraph 11 to reflect this change.
(b) Statutory Basis
    ICE Clear Europe believes that the proposed rule changes are 
consistent with the requirements of Section 17A of the Act \8\ and the 
regulations thereunder applicable to it, including the applicable 
standards under Rule 17Ad-22.\9\ In particular, Section 17A(b)(3)(F) of 
the Act requires that the rule change be consistent with the prompt and 
accurate clearance and settlement of securities transactions and 
derivative agreements, contracts and transactions cleared by ICE Clear 
Europe, the safeguarding of securities and funds in the custody or 
control of ICE Clear Europe or for which it is responsible, and the 
protection of investors and the public interest.\10\
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    \8\ 15 U.S.C. 78q-1.
    \9\ 17 CFR 240.17Ad-22.
    \10\ 15 U.S.C. 78q-1(b)(3)(F).
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    The amendments incorporate changes to the standard terms of CDS 
Contracts that are being widely adopted by market participants to 
address potential concerns that have arisen with so-called narrowly 
tailored credit events. The amendments reflect amendments to the 2014 
Definitions, specifically with respect to the Failure to Pay and 
Outstanding Principal Balance definitions, that have been developed by 
ISDA, in consultation with market participants in both the cleared and 
uncleared CDS markets, and are set out in the NTCE Supplement. ICE 
Clear Europe understands that for the uncleared swap market, these 
amendments are expected to be widely implemented through the NTCE 
Protocol. ICE Clear Europe notes that the heads of the Commission, the 
Commodity Futures Trading Commission and the UK Financial Conduct 
Authority have stated that they welcome the efforts to implement the 
amendments set out in the NTCE Supplement and NTCE Protocol.\11\ ICE 
Clear Europe is proposing to adopt amendments to its CDS Procedures to 
implement these same changes for both new and existing contracts 
cleared by it. As a result, in ICE Clear Europe's view, the amendments 
will enhance the integrity of the credit derivatives markets and the 
confidence of market participants in those markets, and will therefore 
facilitate the prompt and accurate clearance and settlement of such 
contracts at ICE Clear Europe and will further facilitate the 
protection of investors and the public interest, within the meaning of 
Section 17A(b)(3)(F) of the Act. ICE Clear Europe does not believe the 
amendments will materially affect the safeguarding of securities and 
funds in the custody or control of ICE Clear Europe or for which it is 
responsible.
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    \11\ Update to June 2019 Joint CFTC-SEC-FCA Statement on 
Opportunistic Strategies in the Credit Derivatives Markets (Sept. 
19, 2019).
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    The amendments will also satisfy relevant requirements of Rule 
17Ad-22,\12\ as set forth in the following discussion.
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    \12\ 17 CFR 240.17Ad-22.
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    Legal Framework. Rule 17Ad-22(e)(1) \13\ requires a clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ``provide for a well-founded, 
transparent and enforceable legal framework for each aspect of its 
activities in all relevant jurisdictions.'' \14\ The amendments to the 
CDS Procedures are designed to supplement the contractual terms, 
consistent with industry initiatives, to address and reduce the 
likelihood of certain situations involving narrowly tailored credit 
events that have given rise to concerns among market participants and 
regulators, as described above. As such, ICE Clear Europe believes that 
the amendments will enhance the legal framework for clearing of CDS 
Contracts, consistent with the requirements of Rule 17Ad-22(e)(1).\15\
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    \13\ 17 CFR 240.17Ad-22(e)(1).
    \14\ 17 CFR 240.17Ad-22(e)(1).
    \15\ 17 CFR 240.17Ad-22(e)(1).
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    Risk Management. Rule 17Ad-22(e)(3) \16\ requires a clearing agency 
to establish, implement, maintain and enforce written policies and 
procedures reasonably designed to ``maintain a sound risk management 
framework for comprehensively managing legal, credit, liquidity, 
operational, general business, custody and other risks that arise in or 
are borne by the'' clearing agency.\17\ ICE Clear Europe believes the 
amendments, by implementing the NTCE Supplement for existing and new 
CDS Contracts, will be consistent with, and eliminate basis risk as 
compared to, changes being made in the uncleared CDS markets. The 
changes will also ensure the fungibility of new and existing contracts 
in light of the NTCE Supplement amendments, which will facilitate 
ongoing risk management by the clearing house and market participants. 
As a result, in ICE Clear Europe's view, the amendments are consistent 
with the requirements of Rule 17Ad-22(e)(3).\18\
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    \16\ 17 CFR 240.17Ad-22(e)(3).
    \17\ 17 CFR 240.17Ad-22(e)(3).
    \18\ 17 CFR 240.17Ad-22(e)(3).
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(B) Clearing Agency's Statement on Burden on Competition

    ICE Clear Europe does not believe the proposed amendments would 
have any impact, or impose any burden, on competition not necessary or 
appropriate in furtherance of the purpose of the Act. The amendments 
reflect an industry-wide initiative designed to apply to all CDS market 
participants, in both the cleared and uncleared markets. ICE Clear 
Europe's specific amendments to its CDS Procedures will apply 
consistently across all Clearing Members, their customers and other 
market participants. ICE Clear Europe further expects that other market 
participants will make similar changes to their contracts and terms of 
trading. As a result, ICE Clear Europe does not expect that the 
proposed changes will

[[Page 69424]]

adversely affect access to clearing or the ability of Clearing Members, 
their customers or other market participants to continue to clear 
contracts, including CDS Contracts. ICE Clear Europe also does not 
believe the amendments would materially affect the cost of clearing or 
otherwise limit market participants' choices for selecting clearing 
services. Accordingly, ICE Clear Europe does not believe the amendments 
would impose any burden on competition not necessary or appropriate in 
furtherance of the purpose of the Act.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants or Others

    ICE Clear Europe has conducted a public consultation on the 
amendments to its CDS Procedures set forth herein.\19\ ICE Clear Europe 
received two written responses to the consultation pursuant to which 
certain definitional clarifications and minor typographical corrections 
were requested. ICE Clear Europe has made certain drafting 
clarifications to the proposed rules as a result of these requests. 
Certain comments in these responses related to the standard terms 
supplements and confirmations referenced in the revised CDS Procedures, 
and ICE Clear Europe determined that no changes to the proposed rules 
themselves were appropriate as a result of such comments. One commenter 
also questioned whether there was a need to explicitly amend Customer-
CM Transactions as a result of the proposed rule changes; ICE Clear 
Europe determined that no such change was necessary to effectuate the 
proposed rule amendments. ICE Clear Europe will notify the Commission 
of any further written comments with respect to the proposed rules 
received by ICE Clear Europe.
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    \19\ ICE Clear Europe Circular C19/175 (November 12, 2019), 
available at https://www.theice.com/publicdocs/clear_europe/circulars/C19175.pdf.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove the proposed rule change or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml) or
     Send an email to [email protected]. Please include 
File Number SR-ICEEU-2019-027 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number SR-ICEEU-2019-027. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (http://www.sec.gov/rules/sro.shtml). 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for website viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filings will also be available for inspection 
and copying at the principal office of ICE Clear Europe and on ICE 
Clear Europe's website at https://www.theice.com/clear-europe/regulation. All comments received will be posted without change. 
Persons submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-ICEEU-2019-027 and should be 
submitted on or before January 8, 2020.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2019-27197 Filed 12-17-19; 8:45 am]
 BILLING CODE 8011-01-P